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What Is the Underground Economy?
Let me explain what the underground economy is. It refers to economic transactions that are illegal, either because the goods or services are unlawful, or because they don't comply with government reporting requirements. You might hear it called the shadow economy, the black market, or the informal economy.
Key Takeaways
Estimates put the underground economy at 11% to 12% of U.S. GDP, which is about $2.25 trillion to $2.5 trillion. The elements of this economy differ from one nation to another, and even from state to state or city to city. Other names include shadow economy, black market, and informal economy. Examples include dealing in illegal drugs, human trafficking, endangered species, human organs, antiquities, and stolen goods.
Understanding the Underground Economy
It's hard to measure the size of underground economies accurately because they're not under government oversight, so they don't show up in tax returns or official reports. But you can get a sense by tracking unaccounted-for expenditures, which represent the scope of black market activity.
In the U.S., the underground economy hit about $1 trillion in 2009, or 8% of GDP, but by 2013, after the 2008 financial crisis, it grew to an estimated $2 trillion. Current studies show it's 11% to 12% of GDP, so around $2.5 trillion in 2021.
Global Underground Economies
Compared to other countries, the U.S. underground economy is relatively stable, according to a 2018 IMF study on 158 nations from 1991 to 2015. The average shadow economy size was 31.9%. The largest were in Zimbabwe at 60.6%, Bolivia at 62.3%, and Georgia at 64.9%. The smallest were Austria at 8.9%, the U.S. at 8.3%, and Switzerland at 7.2%.
The impact of these economies can be harmful or helpful. In developing countries, lost tax revenue slows growth and public programs, but sometimes, keeping money out of corrupt officials' hands boosts activity and demand.
What Is Considered 'Underground'?
What counts as underground varies by laws in different places. For instance, alcohol is banned in some countries but legal and encouraged elsewhere. Drugs are illegal most places, but cannabis is legalized in some nations and increasing U.S. states.
In the early 1900s, Mexican immigrants brought recreational marijuana to the U.S. During the Great Depression, fears linked it to crime, leading to bans in 29 states by 1931. People still bought and sold it illegally, and later studies showed it's not addictive or a gateway drug, but helpful for illnesses like cancer and AIDS. As of 2022, 37 states and D.C. allow medical use, and 18 states plus D.C. allow non-medical use.
The IRS sees babysitting money over $400 a year as taxable, and if unreported, it's underground. In New York, 53.2% of cigarette sales in 2018 were underground due to high taxes. This includes any unreported income, like under-the-table jobs or smuggling goods to avoid duties. It also covers human trafficking, copyrighted materials, endangered species, antiquities, and illegally harvested organs.
Which Country Has the Largest Underground Economy?
Zimbabwe has the largest at 60.6% of its economy, while Switzerland has the smallest at 7.2%.
What Are the Characteristics of an Underground Economy?
It includes not just illegal stuff like banned drugs or weapons, but also unreported income from jobs like babysitting or paying employees under the table. Bartering without cash that's not reported counts too.
Why Do People Engage in the Underground Economy?
People do it for various reasons, like getting items they can't buy legally, such as outlawed drugs or weapons. It also helps avoid taxes, labor laws, and paperwork.
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